Apple escapes App Store restrictions in e-book conspiracy punishment

Company barred from fixing book prices, but it could have been worse.

After a court ruling stating that Apple led a conspiracy to raise e-book prices above those charged by Amazon, the Department of Justice (DOJ) proposed a broad range of punishments that would have impacted Apple's contracts with book publishers and the company's ability to control how competitors sell content on its platforms.

If the DOJ had its way, Apple would have faced restrictions related to music, movies, and TV shows, not just e-books. But in District Court Judge Denise Cote's final judgment released yesterday (PDF), the DOJ didn't get everything it wanted.

The injunction, set to take effect one month from now and expire five years later, prohibits Apple from enforcing retail price most-favored-nation (MFN) clauses in agreements with e-book publishers and from entering into any agreement with e-book publishers that contains a retail price MFN clause. With the publisher defendants (Penguin, HarperCollins, Hachette, Simon & Schuster, and Macmillan), Apple may not enter any agreement "that restricts, limits, or impedes Apple's ability to set, alter, or reduce the Retail Price of any E-book" or offer discounts and promotions. The judgment also states that Apple must not retaliate against or punish e-book publishers for refusing to enter into agreements with Apple. The company is further prevented from telling e-book publishers anything about its contractual negotiations with other publishers.

These terms, designed to prevent the kind of tactics Apple used to coerce major book publishers into raising prices both on Apple's bookstore and in Amazon's, are in line with what the DOJ proposed. The government wanted restrictions on more than just books, though, with a proposed punishment stating that "Apple shall not enter into or maintain any agreement with any E-book Publisher or supplier of any other form of content (e.g., music, other audio, movies, television shows, or apps) where such agreement likely will increase, fix, or set the price at which other E-book Retailers or retailers of other forms of content can acquire or sell E-books or other forms of content."

Instead of adopting something so broad, Cote merely required that Apple "not enter into or maintain any agreement with any other E-book Retailer where such agreement likely will increase, fix, stabilize, or set the prices or establish other terms on which Apple or the other E-book Retailer sells E-books to consumers."

While the DOJ wanted Apple to terminate all agency agreements with the publishers who were defendants in this case, Cote ordered that Apple can simply modify the agreements to comply with her final judgment.

Cote also didn't give the DOJ what it wanted when it came to restrictions Apple may place on e-book apps sold through its App Store. The DOJ wanted a provision preventing Apple from placing new restrictions on apps already in the store.

"For any E-book App that any Person offered to consumers through Apple’s App Store as of July 10, 2013, Apple shall continue to permit such Person to offer that E-book App, or updates to that E-book App, on the same terms and conditions between Apple and such Person or on terms and conditions that are more favorable to such Person," the DOJ's proposed judgment reads.

That provision does not appear in Cote's order. Cote does order Apple to "apply the same terms and conditions to the sale or distribution of an E-book app through Apple's App Store as Apple applies to all other apps sold or distributed through Apple's App Store." However, she did not accept a DOJ proposal that would have forced Apple to let e-book retailers provide hyperlinks to their bookstores in e-book apps without compensating Apple for resulting sales. That means Amazon and Barnes & Noble still won't use their e-book apps to direct users to their online bookstores, since doing so would require them to add a "buy" button to their apps and give Apple 30 percent of sales revenue.

Cote also said Apple is not prohibited "from introducing new categories of apps with different terms and conditions or from changing its App Store terms and conditions and applying them in a reasonable manner so long as Apple does not discriminate against E-book Apps."

Otherwise, the judgment says Apple has to take various steps to ensure compliance, including training employees and working with an external compliance monitor appointed by the court.

Apple still denies that it conspired to fix e-book pricing, and the company reportedly said that it would appeal the injunction.

DOJ Assistant Attorney General Bill Baer said the agency is "pleased that the court has issued an order supporting the Department of Justice’s efforts to address Apple’s illegal price fixing conduct. Consumers will continue to benefit from lower e-books prices as a result of the department’s enforcement action to restore competition in this important industry. By appointing an external monitor to ensure future compliance with the antitrust laws, the court has helped protect consumers from further misconduct by Apple. The court’s ruling reinforces the victory the department has won for consumers.”

Although Apple fights on, all the publishers in the case have settled, agreeing to pay $164 million back to consumers who paid higher book prices because of the conspiracy with Apple. This will amount to $3.06 per book for customers who bought bestsellers between April 1, 2010 and May 1, 2012.

Promoted Comments

Wait, is this even punishment? Shouldn't the penalty for a crime be more than just telling them to stop committing the crime?

The whole purpose of the legal action is to protect consumers. This...protects...consumers.

Quote:

I don't even know why Apple would want to continue appealing this.

I can't tell if they're serious or just twisted, but they don't seem to accept that they were engaged in any wrongdoing. I mean, seriously, their partners admitted guilt and they were found guilty by a court.

Wow...I bet the publishers are pissed for not having Apple slammed like they were.

I'm a bit confused by this statement. The publishers settled. "Settled" as in they negotiated with the DOJ a mutually agreeable set of actions for them to take, and thus wouldn't risk the penalties from losing a court case. They played it the way they wanted to.

Being pissed at Apple for getting a perceived light remedy is crazy. Apple took all the risks by going to court. The publishers, like all actions prior in this matter, did it to themselves. Their destiny has always been in their own hands. They just never had the guts to take short-term losses for long term gain.

Because their legal counsel has done them absolutely no favors in this entire course of events. So recommending they appeal when they've gotten an almost sweetheart deal for costing consumers millions of dollars would be par for this course.

It's a good thing because it means that they're more likely to get the punishment they deserve.

Wait, is this even punishment? Shouldn't the penalty for a crime be more than just telling them to stop committing the crime? As far as I can see, this isn't even a slap on the wrist. I don't even know why Apple would want to continue appealing this.

'Apple may not enter any agreement "that restricts, limits, or impedes Apple's ability to set, alter, or reduce the Retail Price of any E-book" or offer discounts and promotions."'

In english, this means that Apple cannot let the publishers set the price of an e-book? And Apple is free to set the price of an e-book any way they want?

Cote doesn't prevent Apple from using agency agreements, but an agency agreement is a business model where the content provider sets the prices. Mind as well just bar Apple from entering an agency agreement for e-books.

It's disappointing that Cote removed the terms that would have provided most benefit to consumers. I suppose it's to avoid criticism that she's trying to dictate their terms of business. But given Apple's continued lack of remorse over their wrong-doings there should have been a more punitive angle.

'Apple may not enter any agreement "that restricts, limits, or impedes Apple's ability to set, alter, or reduce the Retail Price of any E-book" or offer discounts and promotions."'

In english, this means that Apple cannot let the publishers set the price of an e-book? And Apple is free to set the price of an e-book any way they want?

Cote doesn't prevent Apple from using agency agreements, but an agency agreement is a business model where the content provider sets the prices. Mind as well just bar Apple from entering an agency agreement for e-books.

Nope, If I understand correctly It means that the Agency model can stay, but Apple cannot restrict Publisher for selling for cheaper in competing store-fronts. Apple used to have a clause that basically said that you cannot sell e-books cheaper than in the iBooks store.

Wait, is this even punishment? Shouldn't the penalty for a crime be more than just telling them to stop committing the crime?

The whole purpose of the legal action is to protect consumers. This...protects...consumers.

Quote:

I don't even know why Apple would want to continue appealing this.

I can't tell if they're serious or just twisted, but they don't seem to accept that they were engaged in any wrongdoing. I mean, seriously, their partners admitted guilt and they were found guilty by a court.

Wow...I bet the publishers are pissed for not having Apple slammed like they were.

I'm a bit confused by this statement. The publishers settled. "Settled" as in they negotiated with the DOJ a mutually agreeable set of actions for them to take, and thus wouldn't risk the penalties from losing a court case. They played it the way they wanted to.

Being pissed at Apple for getting a perceived light remedy is crazy. Apple took all the risks by going to court. The publishers, like all actions prior in this matter, did it to themselves. Their destiny has always been in their own hands. They just never had the guts to take short-term losses for long term gain.

If anything they are upset with Apple for NOT getting a deal and going to court, which now allows THEM, to be punished ( by Apple being punished ).

They even have started to argue this very fact ( that they are being twice ), my first response to that is, "e-book conspiracy say what?"

'Apple may not enter any agreement "that restricts, limits, or impedes Apple's ability to set, alter, or reduce the Retail Price of any E-book" or offer discounts and promotions."'

In english, this means that Apple cannot let the publishers set the price of an e-book? And Apple is free to set the price of an e-book any way they want?

Cote doesn't prevent Apple from using agency agreements, but an agency agreement is a business model where the content provider sets the prices. Mind as well just bar Apple from entering an agency agreement for e-books.

That's exactly what it means. Cote is just being careful to be more inclusionary in wording, to avoid Apple coming up with some other contract arrangement with the same net effect as the agency model. Any agreement they write regarding the purchase of ebooks will likely have some boilerplate saying that Apple, and only Apple, has the right to establish the retail value of the good sold...

I understand the theory behind the DOJ's complaint (MFN prevents a lower-cost platform from selling the same content at a lower price), but it seems the DOJ missed the price-fixing already present in the industry (limit pricing by Amazon in an attempt to drive Kindle sales). Platform pricing looks weird to most of the legal tests applied in antitrust law, and reasonable people can disagree over the economic impacts of a price structure.

They took a look at Amazon and found Amazon while selling some or a majority of their books at a loss the still made money on e-books overall.

It always looked to me as if Apple engaged in a conspiracy with publishers to break Amazon's market power. Amazon had and still has the lion's share of the eBook market. They used to dictate its terms and pricing. Now they no longer do.

I'm not sure that breaks the law, whatever the judge says, or whatever happened to the price of books.

IANAL, and all that.

They Definitely broke the law. I do however agree that the Agency model was not the problem, but everybody so evidently colluding to break amazon forcing them to adopt it, paired with clauses that publishers could not sell cheaper on Amazon (or any other store that was not Apple's one).

I understand the theory behind the DOJ's complaint (MFN prevents a lower-cost platform from selling the same content at a lower price), but it seems the DOJ missed the price-fixing already present in the industry (limit pricing by Amazon in an attempt to drive Kindle sales). Platform pricing looks weird to most of the legal tests applied in antitrust law, and reasonable people can disagree over the economic impacts of a price structure.

That's because this effin' case is about Apple and effin only Apple.. It has jack-all to do with any other accusations of price fixing or collusion, as has been pointed out ad nauseum throughout the internet.

I understand the theory behind the DOJ's complaint (MFN prevents a lower-cost platform from selling the same content at a lower price), but it seems the DOJ missed the price-fixing already present in the industry (limit pricing by Amazon in an attempt to drive Kindle sales). Platform pricing looks weird to most of the legal tests applied in antitrust law, and reasonable people can disagree over the economic impacts of a price structure.

Price-fixing isn't the same as limit pricing. Price-fixing requires collusion. If anything, Amazon is following the classic razor-blade business model (razors are cheap, blades are expensive). They're selling their Kindle devices extremely cheap, thus limiting new entrants because of its low price. All completely legal. Amazon is using its Kindle hardware to get people to use their ecosystem (movies, ebooks, etc). Much like how the Xbox and PS3 systems operate. It's much more profitable over time for a company to get a consumer into their ecosystem than it is to make a profit on the hardware.

It's good that they didn't force Apple to abandon the agency model- the agency model makes far more sense for ebooks.

Apple's contribution to the conspiracy was simply assuring each publisher that Apple was offering the same terms to every other publisher. With that guarantee in place, no publisher had to worry about a prisoner's dilemma with their competition. It was the publishers who then colluded to raise prices.

'Apple may not enter any agreement "that restricts, limits, or impedes Apple's ability to set, alter, or reduce the Retail Price of any E-book" or offer discounts and promotions."'

In english, this means that Apple cannot let the publishers set the price of an e-book? And Apple is free to set the price of an e-book any way they want?

Cote doesn't prevent Apple from using agency agreements, but an agency agreement is a business model where the content provider sets the prices. Mind as well just bar Apple from entering an agency agreement for e-books.

Nope, If I understand correctly It means that the Agency model can stay, but Apple cannot restrict Publisher for selling for cheaper in competing store-fronts. Apple used to have a clause that basically said that you cannot sell e-books cheaper than in the iBooks store.

The MFN clause did not prevent others from selling books cheaper. The MFN clause gave Apple the right to MATCH any price that other were selling at. So if Amazon was selling a book at $9.99 and the itunes books store had it at $12.99 because that was the price the publisher set, then Apple could lower the itunes books store price to $9.99.

Apple did not force the publishers to renegotiate their other contracts to move the the agency model. That was the publishers decision, which they all wanted to do anyway.

Apple did not force the publishers to renegotiate their other contracts to move the the agency model. That was the publishers decision, which they all wanted to do anyway.

And the issue which got Apple in trouble is that they guaranteed the same terms to every publisher, which the DOJ argues was the only way the publishers could have agreed to switch to the agency model. Apple facilitated collusion in the eyes of the DOJ.

The MFN clause did not prevent others from selling books cheaper. The MFN clause gave Apple the right to MATCH any price that other were selling at. So if Amazon was selling a book at $9.99 and the itunes books store had it at $12.99 because that was the price the publisher set, then Apple could lower the itunes books store price to $9.99.

You're conveniently missing the crucial point - Apple would do this at the publishers' expense, whereas Amazon's discounts came out of their own pocket.

I understand the theory behind the DOJ's complaint (MFN prevents a lower-cost platform from selling the same content at a lower price), but it seems the DOJ missed the price-fixing already present in the industry (limit pricing by Amazon in an attempt to drive Kindle sales). Platform pricing looks weird to most of the legal tests applied in antitrust law, and reasonable people can disagree over the economic impacts of a price structure.

Price-fixing isn't the same as limit pricing. Price-fixing requires collusion. If anything, Amazon is following the classic razor-blade business model (razors are cheap, blades are expensive). They're selling their Kindle devices extremely cheap, thus limiting new entrants because of its low price. All completely legal. Amazon is using its Kindle hardware to get people to use their ecosystem (movies, ebooks, etc). Much like how the Xbox and PS3 systems operate. It's much more profitable over time for a company to get a consumer into their ecosystem than it is to make a profit on the hardware.

Actually limit pricing and predatory pricing are illegal, though it is difficult to detect in platform industries. Platforms are much more complicated than "razors and blades," which is part of the reason legal tests have a hard time dealing with them. The whole point of limit pricing is to protect profits, so the whole argument that "it can't be limit pricing because they make money" is vapid.

The MFN clause did not prevent others from selling books cheaper. The MFN clause gave Apple the right to MATCH any price that other were selling at. So if Amazon was selling a book at $9.99 and the itunes books store had it at $12.99 because that was the price the publisher set, then Apple could lower the itunes books store price to $9.99.

You're conveniently missing the crucial point - Apple would do this at the publishers' expense, whereas Amazon's discounts came out of their own pocket.

That does not matter. The MFN clause does not actually prevent others from lowering prices. It just gives the right to match.

Now the usual effect of a MFN clause means that there will not be lowered prices, but the clause itself does not actually explicitly prevent others from doing so.

Apple did not force the publishers to renegotiate their other contracts to move the the agency model. That was the publishers decision, which they all wanted to do anyway.

And the issue which got Apple in trouble is that they guaranteed the same terms to every publisher, which the DOJ argues was the only way the publishers could have agreed to switch to the agency model. Apple facilitated collusion in the eyes of the DOJ.

Apple guaranteeing the same terms to each publisher was not the problem. What got Apple into trouble was when the publishers used the deals they made with Apple to get Amazon to switch. Apple knew the publishers wanted to do this, and made it really easy for them. In fact, it looks like Apple encouraged this.

Apple gives the same terms to each software and music publisher, and that is not a problem.

The MFN clause did not prevent others from selling books cheaper. The MFN clause gave Apple the right to MATCH any price that other were selling at. So if Amazon was selling a book at $9.99 and the itunes books store had it at $12.99 because that was the price the publisher set, then Apple could lower the itunes books store price to $9.99.

You're conveniently missing the crucial point - Apple would do this at the publishers' expense, whereas Amazon's discounts came out of their own pocket.

That does not matter. The MFN clause does not actually prevent others from lowering prices. It just gives the right to match.

Now the usual effect of a MFN clause means that there will not be lowered prices, but the clause itself does not actually explicitly prevent others from doing so.

No. It means the publishers were effectively forced to push Amazon into an Agency agreement as well because they had to control pricing everywhere. Beforehand, while they may not have liked the discounts Amazon was giving, they were at least receiving the wholesale price they'd agreed upon and knew how much money they'd receive per book. Once MFN came into play, any discount by Amazon would mean that their income from Apple would immediately drop, even though they were still receiving the full price from Amazon.

The publishers were forced into ensuring that no-one was allowed to lower prices, or face losing money on every book sold by Apple. If you look through the exhibits in the case it's clear that several publishers really didn't like this, but succumbed to pressure and the desire to break Amazon.

Someone more informed than I could probably confirm this, but, I wonder if they won't cop to the charges and wouldn't accept a deal with the government to keep shareholder lawsuits out of their hair?

They already lost the case. It's too late for them to "cop to the charges"...

What I meant was, agreeing that they were bad actors would mean a heavier legal weight against them in a shareholder suit, versus having a finding put in a place by a judge whilst they never admitted to any wrongdoing.

Maybe if the punitive action was to break up the company involved, this sort of action by companies would stop. Because it's not, this will just happen again, at the latest, as soon as the outside group watching Apple to make sure they're not colluding on book pricing goes away.

And it's only on book pricing. Cote basically did nothing to protect consumers or the market. It'd be nice of a real judge would finally step up and do what needs to be done to reign in the corporate market distortion through illegal activity.

That does not matter. The MFN clause does not actually prevent others from lowering prices. It just gives the right to match.

Now the usual effect of a MFN clause means that there will not be lowered prices, but the clause itself does not actually explicitly prevent others from doing so.

The argument goes something like this.

Suppose it costs Apple $10 to sell a ebook, and the publisher sets his price to net $90. Consumers see a price of $100.

A new and better platform comes along that can sell the same ebook for $5. Without MFNs, it could give the publisher $90 and sell at $95, grabbing market share.

With an MFN, the new (and smaller) platform can't coax the publisher below a $100 retail price (a $95 on both platforms costs the publisher buku bucks on the larger platform). The new guys can give the publisher $95, or they can keep $10 but they can't grab market share because consumers see the same $100 price on both platforms.

This sounds dire for consumers, and it would be, if Apple was a dominant ebook seller at the time. It wasn't, still isn't, and isn't going to be. Apple was trying to bring some "collective bargaining" into an industry dominated by Amazon.

Edit: The new smaller platform could take the extra $5 in revenue and plow it into non-price competition such as a better selection or better customer service to get market share. But legal tests assume people only see prices.

Wait, is this even punishment? Shouldn't the penalty for a crime be more than just telling them to stop committing the crime?

The whole purpose of the legal action is to protect consumers. This...protects...consumers.

Not really. Protecting customers doesn't just mean stopping existing abuse; it means setting up an environment where a company won't even think about abusing customers by making it expensive and painful for them when they're caught. In other words, punishment. If the only cost of committing a crime is having to stop committing that crime, that there is no incentive for companies not to commit the crime.

The publishers were forced into ensuring that no-one was allowed to lower prices, or face losing money on every book sold by Apple. If you look through the exhibits in the case it's clear that several publishers really didn't like this, but succumbed to pressure and the desire to break Amazon.

Like individual union members dislike going on strike, but they do it anyway because they believe it is in their long-term interest.

I can't tell if they're serious or just twisted, but they don't seem to accept that they were engaged in any wrongdoing. I mean, seriously, their partners admitted guilt and they were found guilty by a court.

Mr Cook & Co. should just accept the 12 lashes and move on.[/quote]

It's a PR move, also Apple's lawyers probably get cranky if they don't get to bare their teeth and act boisterously.